Why new office space in Berkeley is so hard to find

The view from the sixth-floor offices of A3Ventures on Berkeley Way is commanding: stand in front of the floor-to-ceiling windows and you can look out at the bay, the Golden Gate Bridge and the San Francisco skyline.

The view inside the offices is almost as impressive. A sunken area with deep couches, a flat-screen TV and a whiteboard serves as a place for meetings. Workers can gather around maple-topped stand-up or sit-down desks or chat around café tables sitting on benches with bright red backs.

A3Ventures occupies the newest “Class A,” (meaning top-of-the-line), office space in Berkeley, a city that, when it builds, tends to build apartments rather than office complexes, principally because of the economics. While developers in San Francisco have plans to construct 9 million square feet of new high-end office space, the number of new office projects in Berkeley can be counted on one hand. And you don’t even need the entire hand.

A3Ventures is occupying a floor of UC Berkeley’s new building at 2121 Berkeley Way (at Shattuck), known as Berkeley Way West. Most of the building, which opened in the fall, is taken up by academic departments, such as the School of Public Health, the psychology department and the Graduate School of Education.

The top three floors, however, were designed to be rented out in order to help pay for the building’s debt service, said Kyle Gibson, director of communications for UC Berkeley capital strategies. The engineering department took the eighth floor, A3 Ventures took the sixth floor and another company, which he would not name, has rented out the seventh floor, he said.

That company is Microsoft, according to Aileen Dolby, an executive vice president with Colliers International. Microsoft acquired two Berkeley-based artificial intelligence companies in 2018, Bonsai and Semantic Machines. They will consolidate both companies into that space, she said.

The total space rented out was 27,000 square feet, said Gibson. Interest in the spaces was high, he said.

A3Ventures, the innovation arm of AAA, the company better known for offering insurance, road service and free maps for its members, had outgrown its location in Oakland’s Jack London Square, said Michael Blasky, a media relations specialist for AAA. The company’s products include GIG Car Share, as well as AAA House Manager and GoMentum Station. A3Ventures needed space to grow and leaped at the opportunity to move into a new office building close to UC Berkeley talent, he said. Being close to BART and AC Transit lines was an added benefit.

“We jumped at it,” Blasky said. “Berkeley was a target city. It was close to UC, it was a gorgeous office space with incredible views. There is a ton of young talent in Berkeley.”

A casual work spot in the Berkeley Way offices of A3Ventures. Photo: AAA

The new tenants are paying about $4 to $4.50 a square foot, said Gibson. That’s significantly higher than the average Berkeley office rental space of $3.40 a square foot, according to Jordan Klein, Berkeley’s director of economic development. (But much lower than Oakland or San Francisco).

Berkeley has about one million square feet of office space, according to John Gordon, a commercial real estate broker. Most of it was built decades ago and not much of it is considered Class A space.

The last new office building constructed in Berkeley was built in the 1980s. It was so controversial the man who got it entitled said, “never again.”

The Wells Fargo building at 2140 Shattuck Ave. was built in 1925. The Skydeck building (formerly known as the Great Western Building or the Power Bar building) at 2150 Shattuck Ave. was constructed in 1970. The last completely new office building constructed in Berkeley was the Golden Bear building at 1995 University Ave. It was built in the late 1980s, and its development was so controversial that Michael Korman, who got the building entitled, swore never to attempt an office building again. That reputation still haunts Berkeley today.

“Berkeley traditionally has had a reputation of not delivering new product,” said Michael D. Keely, a senior vice-president of CRBE, a commercial real estate firm. “It’s more challenging to get something built and approved.”

Many of the existing office buildings in Berkeley have small footprints, too, or are cut up into smaller spaces, said Keely. One reason the Berkeley Way West building was in demand was due to its large floor-plates. Companies could take over an entire floor. And it was close to transportation, another amenity that many companies with young workers are looking for, said Keely.

Lack of office space forces growing startups to move away

The Office on Addison Street, one of several co-working spaces in Berkeley. Once startups get too big for co-working they tend to be forced out of Berkeley due to the lack of office space. Photo: Tracey Taylor

The dearth of new office space has been a problem for Berkeley, according to Klein. There are lots of startups that do well in the city in incubator spaces like SkyDeck or co-working spaces like WeWork or The Office. But once they get funded and grow, they tend to leave, he said. (Berkeleyside has an office at WeWork.)

“One of Berkeley’s biggest challenges is retaining businesses as they grow, often to a profitability stage,” said Klein. “When they are ready to hire 15 to 20 employees, we don’t have space. They love Berkeley, they want to stay but they can’t find 10,000 to 20,000 square feet of space.”

“We keep losing companies to Oakland and Emeryville,” said John Caner, executive director of the Downtown Berkeley Association. “We’re losing these startups because we just have limited space.”

It doesn’t help that a lot of Berkeley’s office space is “funky,” said Caner.

Daniel Wexler, who lives in Berkeley, operated his company Zorroa, a visual intelligence platform, out of the WeWork building at 2120 University Ave. for a few years. Until recently, there were about five people working for the company, some of them remotely.

Zorroa got $7 million in funding in July and Wexler decided he needed an office that could accommodate more workers, in part to create a sense of community. He wanted to stay in Berkeley and spent about two months searching for good office space, he said.

“We looked everywhere in Berkeley,” he said. “All of them weren’t the quality level we were looking for.”

There is a particular look and style that people in startups are looking for and providing high-quality office space is necessary to attract workers in this competitive market for technology workers, said Wexler. It needs to be modern and open-plan, either newly built or in a refurbished older building.

Frustrated by the lack of choice in Berkeley, Wexler started to look in Oakland. The first weekend he saw four spaces that were nicer than any he had seen in Berkeley, he said. Zorroa rented an entire floor in the Tribune Tower, right behind the letters. He now has 30 employees.

“It’s wonderful,” he said. “Having that whole floor — that’s what makes it feel like our team. We took it to another level.”

Wexler likes the urban feel of downtown Oakland. That said, there are drawbacks to downtown Oakland which is why Wexler hopes his company can eventually move back to Berkeley. The area is more dangerous, he said, and is like a financial district, deserted at night and on the weekends.

“The downtown environment in Berkeley is better,” he said.

Zorroa hasn’t left Berkeley completely. Many of the company’s employees work remotely, so Wexler rented a two-bedroom apartment at Varsity Berkeley on Durant Avenue so they have a place to stay when they come to the Bay Area, he said.

Why aren’t more developers building office space?

While developers in San Francisco are rushing to get their projects entitled before the city meets its building cap, there is no similar rush in Berkeley. Instead, there is much more demand for student housing or market-rate housing, in part, because it is easier to secure financing, according to a number of realtors. Also, Berkeley adopted the Downtown Area Plan which limits the number of privately developed highrises in the downtown to three 180-feet high buildings and two 120-feet high buildings. Four tall buildings are going up, and none are office complexes.

“Offices don’t ‘pencil out,’” Michael Caplan, Berkeley’s former economic development manager told Berkeleyside a few years ago. “It’s more lucrative for developers to build housing.”

The economics of building new office space doesn’t work, said Dolby from Colliers.

“Rents don’t justify new office space,” she said.

If Berkeley rents run $48 a square foot annually, rents in San Francisco and Oakland go for $80 to $90 a square foot, she said. In addition, the demand is just not there. Growing tech companies want to be near other tech companies.

Dolby said she has two 10,000-square-foot office spaces in Berkeley she is trying to lease, but no takers. The space is nice, she said. The issue is that technology companies want to be close to other technology companies and there isn’t that critical mass in Berkeley. Successful tech companies also want to know there’s room to expand as they grow, in the same building or area they have selected.

Oakland and San Francisco have numerous buildings with 600,000 square feet of Class A office space. A lot of clustering can happen there, said Dolby, that can’t happen in a smallish Berkeley building. Emeryville also has more of this kind of office space than Berkeley, according to a number of agents.

A new office building for Berkeley — the first in 30 years

A rendering of what 2120 Berkeley Way will look like. Image: Devi Dutta Architecture

One developer is building a new Class A office building in Berkeley — the first private office space constructed in 30 years. But the challenges he has encountered show why it can be hard to build in Berkeley.

Nathan George purchased the old UC Press building at 2120 Berkeley Way, right across the street from UC’s Berkeley Way West building, in 2015. The price was $4.8 million, according to the Daily Cal.

George is converting the three-story structure to a six-story office building by inserting a new steel core. But he initially had difficulty lining up financing, he said. Banks and lenders wanted a tenant in place before they would loan any funds, said George. But it was hard to find anyone who was willing to wait a year or more before moving in, he said. George worked with Keely of CBRE to look for tenants.

Eventually, George leased the entire 45,000-square-foot building to WeWork, the fast-growing global co-working company with a valuation of $47 billion. He plans to deliver the space to the company in late 2019. WeWork is planning to open the offices, just about a block from its existing University Avenue building, in 2020.

If there had been more office construction in Berkeley, it might have been easier to get a lender involved earlier, said George.

“It’s a tough market,” he said. “One reason is there isn’t enough of an office cluster in Berkeley.”

George and Korman both told Berkeleyside that when UC Berkeley gets into the office rental market, it has an unfair advantage over local developers. For instance, while building Berkeley Way West, the university did not have to go through Berkeley design review or comply with zoning laws even though some of the space was to be used for private companies, said George. As a state institution, UC Berkeley is exempt from those laws, making development less expensive. George even sent a letter to Chancellor Carol Christ in December 2017 stating his concerns and suggesting he thought the university was acting illegally in developing commercial office space. George said that a potential client stopped discussing renting 2121 Berkeley Way when it discovered the university planned to rent space across the street.

“The university, they’re not supposed to be a landlord to private property,” said Korman. “[But] the university can do (development) it without the difficulties of a private developer.”

WeWork’s decision to open a second outpost in Berkeley reflects another trend. There may not be much large office space, but there is a high demand for co-working space that is geared toward smaller companies. Currently, there are six co-working spaces in Berkeley: Sandbox Suites at 1900 Addison St.; NextSpace at 2081 Center St.; The Office at 1935 Addison St.; Downtown Berkeley Center at 2001 Addison St.; Coworking with Wisdom at 2222 Harold Way and WeWork at 2120 University Ave. Impact Hub Berkeley at 2150 Allston Way shut down in 2018.

So Berkeley grows companies, but cannot always keep them.

“We have spurred growth in Oakland and Emeryville because their policies are much more accepting,” said Korman.

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